Significant changes in Social Security claiming strategies were abruptly enacted by the 2015 Bipartisan Budget Act signed by President Obama on November 2, 2015. The changes close what is referred to as “unintended loopholes” that were employed by savvy retirees and their spouses/ex-spouses to maximize their total payout from Social Security?
Much of the information that has been published in journals, magazines and blogs is confusing to the consumer. How can you pare down what divorcing clients need to know and what they can ignore as “white noise”?
WHAT LOOPHOLES CLOSED?
1. File and Suspend
Under the old provisions, a retiree could file for Social Security benefits at Full Retirement Age and then immediately suspend their benefits. Why would anyone play this cat and mouse game with Social Security? This was a clever strategy that allowed a spouse or ex-spouse to begin receiving spousal benefits on the retiree’s earnings record (generally 50% of the retiree’s benefit) while the spouse or ex could delay receipt of their own benefit, thus allowing for an 8% increase in the starting dollar amount per year of their benefit (up to age 70).
Up until April 30th of this year, this strategy will work. For those who suspend their benefit after April 30, 2016, this strategy will be unavailable. If benefits are suspended after April 30, 2016 for the retiree, they will also be suspended for anyone receiving benefits on that person’s earnings record.
The take-away? If this could benefit your client, they need to implement within the first four months of the year!
2. Restricted Application Phaseout: For those born on or after January 2, 1954 (age 62 and younger):
In the past, a spouse or ex-spouse could receive their spousal benefits (generally 50% of the retiree’s benefit) on a retiree’s earnings history and then switch to his/her own higher benefit amount up to age 70. For those who are younger than 62 or turned 62 on January 2 of this year, that option is no longer available. If you start claiming a spousal benefit, you can’t switch to your own higher benefit at a later date.
However, if you were born before January 2, 1954, you can still take advantage of this clever strategy. Even more important, whenever you were born, as long as you delay receipt of your own benefit, it will increase by 8% per year from age 66 to 70.
WHAT IS STILL THE BEST CLAIMING STRATEGY?
As indicated above, the most valuable claiming strategy for Social Security has not been repealed: delay, delay, delay! Every year that a Social Security recipient delays receipt of benefits between Full Retirement Age (66 for most retirees) and age 70, they will receive an 8% increase on the starting dollar amount of their lifetime payments. As it’s extremely difficult to replicate a guaranteed 8% rate of return on any investment, this strategy is still the most important and the most under-used. Furthermore, any client who considers taking reduced Social Security benefits starting at age 62 up to full retirement age needs to offset the permanent reduction in their benefit against their current cash flow needs.
What is STILL the best TIP for DIVORCED CLIENTS?
Don’t remarry before turning 60 (or 50 if you’re disabled). Ex-spouses are entitled to full Social Security survivor benefits on their ex’s earnings record–as long as they were married for 10 consecutive years and they don’t remarry before age 60! If they get remarried at age 60 and 1 day, they can still collect full survivor benefits for life.
Keeping in mind that Survivor Benefits can be as high as 100% of the full amount the retiree was entitled to, this is the one tip that divorcees can’t afford to overlook.